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Fred Clements: Are bikes the black hole of IBD profitability?

Published July 29, 2014
A blog by NBDA executive director Fred Clements.

Editor’s note: This blog post was written by Fred Clements, executive director of the National Bicycle Dealers Association. Clements’ previous blog posts can be read on bikedealerblog.wordpress.com.

A new financial study confirms a sad truth about bicycle retailing: most bike shops do not make a profit on the sale of new bicycles.

This may be old news to many, especially retailers wrestling with unruly income statements and stiff price competition, but the new report uses hard numbers to show that the failure of new bicycles to generate retail profit is much more than urban myth.

In fact, the report shows that new bicycle margins do not even cover their share of the basic operating costs of the average bike store. Overall store profitability is only possible because sales of higher margin items such as parts and accessories drive the averages up, categories now facing increasing price competition from on-line retailers.

The source is the NBDA Cost of Doing Business Survey, conducted by market research firm Industry Insights every two years since 1993. It is different from many surveys available on bike retailing because it is based entirely on financial statements and hard numbers. No opinions, no spin, just arithmetic.

The survey also shows that despite huge changes in the market over the years, many retail financial fundamentals have remained solidly consistent regardless of the year, size of business, region or business focus. The bikes may have changed, the stores may be nicer, operations may be more efficient, but the numbers tell the tale when it comes to profitability.

The 2014 study is based on 2013 numbers. It shows that the average reporting retailer did a better job of expense control than in 2011, the most recent comparison year. The average retailer's operating expenses (expenses as a percent of gross sales) were 42.2% in 2011. In 2013, that number fell dramatically to 38.7%, mostly through payroll reduction.

The lower expense number was still not enough to make new bicycle sales profitable as a category though. With an average margin of 35%, new bicycle sales yielded an average margin 3.7% below the break-even point for these businesses.

The biggest expense factor for the average store was payroll. Payroll expenses dropped from 25.6% in 2011 to 23.5% in 2013.

Occupancy expenses, rent, utilities and maintenance, were 8%.

"General and Administrative" expenses were 7.2%, with advertising and promotion the largest expenditure at 1.7%. This category also included office expenses, phone, travel and insurance.

The survey also illustrates that some things about bike shops have remained remarkably consistent in the last 20 years, based on a comparison with the 1993 survey. Some examples:

  • In 1993, bicycles represented 49% of the average store's sales. In 2013, the number was 46%.
  • In 1993, parts and accessories represented 33% of the average store's sales. In 2013, the number was 31%
  • In 1993, repair generated 11% of the dollars for the average store, compared with 13% in 2013.
  • In 1993, the average store's net profit was 4.7% compared to 5.7% in 2013. The high profit firms (the top 25%) returned 8.6% in 1993, and a much better 13.7% in 2013.

Some other highlights from the study:

  • While the operating margin of 44.4% (average margin for all products sold) was down from 2011, as was the net profit, the 5.7% net profit was in line with that of previous years.
  • High profit stores (the top 25%) more than doubled that number, returning a 13.7% profit due to a combination of lower costs and higher margins. High profit stores reported operating margins of 49.8%, and operating expenses of 36%.
  • High profit stores did manage to make a profit on bicycle sales, with an average margin of 37% versus their break-even of 36%.
  • The higher margin areas include parts and accessories (46%), fitness equipment (40%) and clothing (44%).
  • Bicycle retailing has dramatically changed over the years, but the calculator shows that many of the financial basics have remained startling consistent. Also consistent are the reasons high profit stores make more money. They maintain higher margins and control their costs, same as they did 20 years ago.

For more on the NBDA Cost of Doing Business Survey, visit the NBDA website.

 

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